The proliferation of private equity funds into all reaches of the US middle market has been well documented. Increased activity in the lower and core segments of the middle market is easy to see, particularly when assessing median transaction size, which declined from a high in 2014 to $133 million last year and $128.6 million through the end of 3Q.
The slides aren’t dramatic, of course. But as can also be seen in the relatively more resilient proportions of dealmaking within the lower middle market, firms are responding to competitive and high-priced conditions by sourcing more widely. At this point, the question of supply within the lower middle market inevitably comes up, although the sheer number of enterprises valued between $25 million and $100 million may well provide plenty of fodder for investors going forward.
According to Bain’s Global Private Equity Report 2015, just 3% of businesses valued below $100 million were backed by PE firms. And, per the Middle Market Center, nearly 200,000 businesses are in the US middle market specifically (defining a middle-market company as one with annual revenues between $10 million and $1 billion).
As such, it would seem there remain plenty of opportunities for PE funds to stay active, with only caution around the cost and quality of prospective targets serving to slow down the pace of investment. Those factors in and of themselves have served to decelerate activity for some time now. As caution around the quality of prospective targets persists, then a slower rate of investment is to be expected, even accounting for a typical year-end bump.